Scandinavian Working Papers in Economics
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Research Institute of Industrial Economics (IFN) Working Paper Series

No 920:
Social Trust and Central-Bank Independence

Niclas Berggren (), Sven-Olof Daunfeldt () and Jörgen Hellström

Abstract: Central banks have been made more independent in many countries. A common rationale has been the existence of a credibility (or lack-of-trust) problem for monetary policy. This indicates a possible and until now unexplored link between social trust and central-bank independence. Our empirical findings, based on data from 149 countries, confirm that there is such a link, in the form of a u-shaped relationship. We suggest that two factors help explain this finding: the need for this kind of reform and the ability with which it can be implemented. At low trust levels, the need for central-bank independence is strong enough to dominate the low ability; at high trust levels the ability for reform is high and dominates the low need; at intermediate trust levels there is neither need nor ability strong enough to generate very independent central banks.

Keywords: Trust; Credibility; Reforms; Monetary Policy; Inflation; Central Bank; Time Inconsistency; (follow links to similar papers)

JEL-Codes: E52; E58; P48; Z13; (follow links to similar papers)

25 pages, May 23, 2012

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This paper is published as:
Berggren, Niclas, Sven-Olof Daunfeldt and Jörgen Hellström, (2014), 'Social Trust and Central-Bank Independence', European Journal of Political Economy, Vol. 34, June, pages 425-439

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